Plan of Attack


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Many small business owner clients of the Walla Walla, Wash.-based accounting firm Thompson & Kreitzberg either live in or work in nearby Oregon, which unlike Washington, imposes a state income tax. With many of its clients commuting across the state border, Kristal Hassler, CPA and partner at Thompson & Kreitzberg, says she needs to quickly assess whether its Oregon taxpayers will be subjected to the alternative minimum tax since its income tax is deductible on the federal return if the client itemizes.

That would be a tough job to accomplish manually; but tax planning software, in this case Creative Solutions Planner CS, makes the job possible.

"Without Planner CS," Hassler says, "I can't tell whether the AMT is going to be applicable."

Partner Insights

If we think they are going to owe and we can itemize their deductions we would prepay them, explains Hassler. If we prepay them, she says, sometimes AMT kicks in and they'll end up owing the tax anyway.

Tax Planning: The Easy Way

Tax planning software isn't for everybody. In fact, it's not for small clients, says Bruce Andersen, a sole proprietor based in Woodland Hills, Calif.

For many preparers, a dedicated tax planning package is "real fancy and more expensive, and, in the end, you don't get much," says Andersen.

"For most of the clients I am able to work with, I am able to duplicate last year's tax file and put in changes and it usually works fine," says Andersen. What most small clients what in terms of planning involves the need to print out Schedule C with changes, and Rental Property. The other area of concern is charitable contributions.

The kinds of taxpayers who benefit from tax planning software are those "at an AGI at the low-end of $500,000, and more likely in the $750,000 to $1 million range where it requires multi-year planning," he continues.

Small clients aren't that interested in planning for ten years out.

"Generally when I work with this stuff, the question is, 'What does next year look like?'" Andersen says.

"The software determines those pieces," Hassler says; referring to Creative Solutions' integratable tax planner, which can import client data from UltraTax CS and GoSystem Tax.

That's the kind of complexity that drives the need for tax planning software--applications that help practitioners figure out how to minimize the impact of taxes on clients, not just for one year, but also for a number of years, and under an array of possible influences that produce calculations that would be nearly impossible to do manually.

The increasing number of taxpayers affected by the AMT has been particularly important in driving the need for tax planning software, says Teresa Mackintosh, vice president of marketing for Creative Solutions.

Tax planning software helps users identify items to minimize the tax implications for their high net worth clients, business owners and quarterly tax filers.

Such software can help accountants calculate the impact of such events as buying or selling real estate, gifting or charitable contributions, and exercising stock options.

CSI says it has more than 3,600 users of its Planner CS, which costs $550 for the Federal, plus $100 for the first state and $50 for all subsequent states. The software features a "Watch Window" at the bottom of every page that shows the adjustable gross income or net tax.

"You can go out as far as you want," says Mackintosh. "It's a constant, exploding, what-if analysis."

Complexity benefits tax preparers who helps clients wade through ever changing laws and regulations. And complexity dictates the use of tax planning software.

It's a market that has grown enough that over the last few years, where once many tax software companies had been willing to interface with industry-leader BNA Software's Tax Planner, they have been selling their own applications.

CSI entered the market four years ago; Drake Software fielded its own package last year; and ATX/Kleinrock, which says it has planning features in its 1040, is considering a move.

Ten Tax Planning Opportunities

Child Tax Credit. Filers can take a child tax credit of up to $1,000 per child provided the taxpayer's adjusted gross income is below certain limits. The child must be age 16 or younger at the end of the year, a US citizen, or resident alien, and related by birth, marriage, adoption, or foster arrangement.

Child and Dependent Care Credit. This credit is based on a percentage of childcare, daycare, or adult daycare services paid for dependents 12 or younger or dependents who cannot care for themselves.

Adoption Tax Credit. Clients qualify for a tax credit of up to $10,630 per eligible child if they adopted a child and paid related out-of-pocket expenses.

Alimony Paid Deductions. Alimony or separate maintenance payments, made under a divorce decree or separation instrument, are deductible if specific requirements are met.

Domestic Production Activities Deduction. Beginning with the tax year 2005, businesses with manufacturing and other "qualified production activities certain companies can take a 3 percent deduction from net income for U.S-based business activities. The deduction increases to 6 percent in 2007, and 9 percent in 2010.

Early Withdrawal Penalty Deduction. Penalties charged withheld from the proceeds withdrawn from a certificate of deposit or other time-deposit savings account prior to maturity can be deducted.

Self-Employment Tax Deduction. Self-employed clients can deduct half of their Self-Employment Tax.

Self-Employment Health Insurance Deduction. Self-employed taxpayers deduct their health insurance expenses, after subtracting 50 percent of self-employment taxes from their income, along with contributions made to retirement plans.

SEP, SIMPLE, Retirement Plan Contribution Deduction. Self-employed clients can take a deduction for contributions made to a SEP, SIMPLE, or Keogh plan, if they have continued money to plan by the due date of the tax return. The maximum contribution is the lesser of 20 percent of self-employment income or $42,000.

Retirement Savings Contribution Credit. A deduction of up to $2,000 contributions made to any retirement plan can made by those with an AGI of $50,000 or less for a married couple filing jointly, $37,500 or less for head of household or $25,000 or less for single person or married couple filing separately. The percentage of tax credit contributions is 10 percent, 20 percent, or 50 percent depending upon the adjusted gross income. Source: Your Guide to Tax Planning: United States.

"ATX is evaluating tax planning as a standalone module that can be purchased separately from the ATX tax preparation software line, but at this time we have not made a decision to do so," says Ken Crutchfield, director of marketing for the Rockville, Md.-based company.

Some companies still rely on BNA, whose most appealing product has been the BNA Income Tax Planner with Fifty States. Rome, Ga.-based TaxWise began offering the BNA product to its users two years ago, selling both the tax planner and the BNA Fixed Assets module.

BNA is still used by preparers who buy compliance software from companies with competing planning products. The company says its software sports automated interfaces with CSI's UltraTax CS and GoSystem, Lacerte Tax Software, CCH's ProSystem fx Tax, and Petz Enterprise's CrossLink.

The BNA Income Tax Planner can calculate projections for up to ten years or cases, and seven modes of analysis including years within cases, cases within years, adjustment, difference, taxpayer-spouse, annualization, and minor child.

The latest release of the Income Tax Planner includes provisions of the Tax Increase Prevention and Reconciliation Act of 2005, which was signed by President Bush on May 17.

One week after the legislation passed, BNA had updated its Income Tax Planner, and the company says its ability to act quickly is important to its customers.

BNA Software's parent, BNA, has reporters for its Daily Tax Report covering Capital Hill, explains Glenn Reemes, director of program management for the Washington D.C.-based vendor. At the same time, the software products division has a team of CPAs and tax attorneys whose sole job is to monitor and analyze proposed changes early in the process so if enacted they are in the hands of its customers as soon as possible.

"We have an advantage," says Reemes, "Because we are on the Hill, we can get a head start on programming and testing."

The latest feature in the planning application is a Security Translator Analyzer that automatically determines the type of gain, taxable amount, and tax for each capital transaction and lets users post each transaction to a specific case or cases.

"It automatically determines the type and amount of gain or loss for each capital transaction," says Reemes. "Then, you can post it to different what-if scenarios or cases."

Other laws incorporated in the software are the Tax Increase Prevention and Reconciliation Act of 2005 and the Katrina Emergency Tax Relief Act of 2005.

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